Supply and Demand

Some years back, while we were in the middle of a protracted argument in Oregon about adding additional land for development, there was an article in the paper in which environmental advocates and government regulators were quoted to the effect that they had never heard anyone say that there was a connection between land supply and land price.

My response was that if no one had said that, it was only because we all thought it was the functional equivalent of saying that if you walk in the rain you’re going to get wet . . . so we had to spend several meetings discussing the basic notion of supply and demand.

Even those who have never darkened the door of an economics class understand the connection between supply and demand and pricing. They might not know it as a fundamental principle governing the economy, but pretty much everyone understands that when there’s a lot of anything – whether we’re talking groceries or gasoline – the price goes down, and when something is in short supply, the price goes up. It’s something you learn as a kid, when you’re trying to get your friend to part with one of her last pieces of Halloween candy, and it’s as close as you’re going to come to a universally recognized economic truth – except, apparently, when it comes to government policies regarding housing.

Many communities across the U.S. are apparently operating under the impression that they can unilaterally repeal the law of supply and demand when housing is on the table.

It is widely known that ever since the Great Recession, housing production has not caught up with housing demand, with the unsurprising result that prices for both rental and owner occupied housing are at record high levels in communities all across the country. To use numbers from Oregon, since I know them by heart: we should be building around 25,000 housing units of all sorts (for sale, for rent, big, small, attached, detached) per year statewide, just to keep up with the normal growth in the state.

Last year, in what was the highest level of production in nearly 10 years, we built just under 20,000 units, which was great news other than the fact that it amounted to 5,000 units fewer than what was needed. And since we’ve been underbuilding relative to demand for quite a while, economists here estimate that we have a shortage of over 100,000 units – and housing prices and rents in Oregon reflect that supply and demand disconnect.

Similar if not worse numbers afflict most other states as well, which is why it’s encouraging that some governments are starting to look at policies that would increase the supply of housing and thereby drive prices down by making housing production easier and less expensive. To be fair, there probably aren’t that many communities that are deliberately trying to make housing expensive (at least not on the record) by making it more difficult and costly to build, but the net governmental response to what is a national housing crisis might as well be intentional when it comes to the impact on the ground.

People are struggling to find affordable rental housing? Let’s adopt rent control or inclusionary zoning, then learn later that little to no new housing projects got built as a result. People who work in a community can’t afford to buy a house there? People in poor neighborhoods are being priced out by redevelopment and infill? Rush hours are now rush days, since people can’t live close to where the jobs are?

Whether it’s done intentionally or by accident, the effect is the same: we have – city by city, and coast to coast — policies, procedures and practices on the books whose effect is to decrease housing supply and consequently increase housing price. Large lots, large setbacks, tree protection ordinances, barriers to infill and redevelopment, NIMBY responses to increasing density, and on.

The law of supply and demand continues to be fully operational, no matter what elected officials might think and notwithstanding how inconvenient that might be for their re-election campaigns, and housing will continue to be expensive as long as there are fewer units being built than there are people looking to buy or rent them.